Question

Assume that you are considering purchasing stock as an investment. You have narrowed the choice to either Verge Corporation stock or Express Company stock and have assembled the following data for the two companies.Your strategy is to invest in companies that have low​ price-earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.

Selected income statement data for the current​ year:

  

	Verge	Express
Net sales (all on credit). . . . . . . . . . . . . . . .	$599,000	$527,000
Cost of goods sold. . . . . . . . . . . . . . . . . . . .	458,000	382,000
Income from operations. . . . . . . . . . . . . . .	91,000	69,000
Interest expense. . . . . . . . . . . . . . . . . . . . .	—	10,000
Net income. . . . . . . . . . . . . . . . . . . . . . . . . .	70,000	34,000

Selected balance sheet and market price data at end of current​year:

  

	Verge	Express
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . .	$28,000	$38,000
Short-term investments. . . . . . . . . .	7,000	13,000
Current receivables, net. . . . . . . . . . .	189,000	168,000
Inventories. . . . . . . . . . . . . . . . . . . . . .	219,000	190,000
Prepaid expenses. . . . . . . . . . . . . . . .	18,000	12,000
Total current assets. . . . . . . . . . . . . . .	461,000	421,000
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . .	975,000	936,000
Total current liabilities. . . . . . . . . . . . . . . . .	364,000	340,000
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . .	666,000	693,000
Preferred stock, 9%, $150 par. . . . . . . . . . . .		30,000
Common stock, $1 par (115,000 shares). . . .	115,000
$5 par (10,000 shares)		50,000
Total stockholders' equity. . . . . . . . . . . . . . . .	309,000	243,000
Market price per share of common stock. . . .	$7.32	$65.73

Selected balance sheet data at beginning of current​ year:

  

	Verge	Express
Balance sheet:
Current receivables, net. . . . . . . . . . . . . . . . .	$146,000	$192,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . .	205,000	193,000
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . .	852,000	914,000
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . .	—	311,000
Preferred stock, 9%, $150 par. . . . . . . . . . . .		30,000
Common stock, $1 par (115,000 shares). . . .	115,000
$5 par (10,000 shares)		50,000
Total stockholders' equity. . . . . . . . . . . . . . . .	265,000	219,000

1.	Compute the following ratios for both companies for the current​year, and decide which​ company's stock better fits your investment strategy.
	a.	Quick​ (acid-test) ratio
	b.	Inventory turnover
	c.	​Days' sales in average receivables
	d.	Debt ratio
	e.	​Times-interest-earned ratio
	f.	Return on common​ stockholders' equity
	g.	Earnings per share of common stock
	h.	​Price-earnings ratio

Requirement 1. Compute the ratios for both companies for the current year and decide which​ company's stock better fits your investment strategy.
Begin by computing the​ ratios, starting with the quick​(acid-test) ratio. ​(Abbreviations used: Avg.​ = average,​ Cash* = cash and cash​ equivalents, Mkt​ = market,​ o/s =​ outstanding, SE​= stockholders'​ equity, and ST​ = short-term.)
a. Quick​ (acid-test) ratio
Select the formula and then enter the amounts to calculate the quick​ (acid-test) ratios. ​(Round the ratios to two decimal​places, X.XX.)

(

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Quick ratio
Verge
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+

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=

Express
(

+

+

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=


b. Inventory turnover
Select the formula and then enter the amounts to calculate the inventory turnover for each company. ​(Round the ratios to two decimal​ places, X.XX.)


/

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Inventory turnover
Verge

/

=

Express

/

=


c.​ Days' sales in average receivables
Select the formula and then enter the amounts to calculate​ days' sales in average receivables for each company. ​(Use a​ 365-day year. Round intermediary calculations to the nearest whole​ number, X. Round your final answers to one decimal​ place, X.X.)


/

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Days' sales in average receivables
Verge

/

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Express

/

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d. Debt ratio
Select the formula and then enter the amounts to calculate the debt ratio for each company. ​(Enter the debt ratio in decimal form to two decimal​ places, X.XX.)


/

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Debt ratio
Verge

/

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Express

/

=


e. ​Times-interest-earned ratio
Select the formula and then enter the amounts to calculate the​times-interest-earned ratio for Express. ​(Round the ratio to one decimal​ place, X.X.)


/

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Times-interest-earned ratio
Express

/

=


f. Return on common​ stockholders' equity
Select the formula and then enter the amounts to calculate the return on common​ stockholders' equity​ (ROE) for each company.​(Complete all answer boxes. If an account has a zero​ balance, enter a​ "0". Enter the ROE as a percentage rounded to the nearest​one-tenth percent,​ X.X%.)

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ROE
Verge
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%
Express
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=

%

g. Earnings per share of common stock
Select the formula and then enter the amounts to calculate earnings per share​ (EPS) for each company. ​(Complete all answer boxes. If an account has a zero​ balance, enter a​ "0". Round EPS to two decimal​ places, X.XX.)

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EPS
Verge
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Express
(

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=


h.​ Price-earnings ratio
Select the formula and then enter the amounts to calculate the​price-earnings (P/E) ratio for each company. ​(Enter amounts in the formula to two decimal​ places, X.XX, but then round the​ P/E ratios to one decimal​ place, X.X, as​ needed.)


/

=
P/E ratio
Verge

/

=

Express

/

=


Which​ company's stock better fits your investment​ strategy?

The common stock of

▼

Express Company

Verge Corporation

seems to fit the investment strategy better. Its​ price-earnings ratio is

▼

higher than that of Express Company

higher than that of Verge Corporation

lower than that of Express Company

lower than that of Verge Corporation

​,

and

▼

Express Company appears to be in slightly better shape than Verge Corporation

Verge Corporation appears to be in slightly better shape than Express Company

.

Answer 1

1-QUICK(ACID TEST ) RATIO: Current assets, loans &advances - inventories/ Current liability  

verge: 461000- 219000/ 364000 = .67

express: 421000-190000/ 340000 = .68

2-INVENTORY TURNOVER RATIO; Cost of goods sold or sales / average inventory

average inventory;  opening + closing /2

verge; 219000 + 205000 / 2 = 212000

express; 190000+193000 /2 = 191500

ITR

; VERGE = 458000 / 212000 =2.16

EXPRESS=382000/ 191500 =1.99

3-DAYS SALES IN AVERAGE RECEIVABLES;  average receivables/ credit sales × 365

average receivables; opening+ closing/2

verge; 146000+189000/2= 167500

express; 192000+168000/2= 180000

Here all sales are in credit

ratio;

verge; 167500/599000 ×365 = 102.06

express; 180000/ 527000 × 365 = 124.67

DEBT RATIO; Total liabilities/ total assets

verge; 666000/975000 =.683

express; 693000/936000 =.740

TIMES INTEREST EARNED RATIO; EBIT/ Interst expense

verge; 70000/0= 0

express; 34000+10000/10000= 4.4

RETURN ON STOCKHOLDERS EQUITY; Net income/ share holders equity

verge; 70000/309000= .23

express; 34000/243000=.14

EPS OF COMMON STOCK; Earning available for equity shareholders/ outstanding equity shares

verge; net income-preference dividend/ ouststanding equity share

70000-0/ 115000=.609

express; 34000-27000/10000=.70

PRICE EARNING RATIO; Market price per share/ earning per share

verge; 1/.609=1.642

express; 5/.7 =7.14

interpretation;

NOTE; Higher P/E ratio means investors are paying higher price for the stock as compared to its earnings.

The common stock of verge corp. seems to fit the investment strategy better, its price earning ratio lower than that of express company and verge corp appears to be slightly better shape than express company.